A New Growth Story: A New Point of Inflection

Last six months have been a mixed bag for the Indian real estate industry. Most of us kept guessing what each policy change and/ or an executive decision would lead the industry into? While GST was a welcome policy initiative leading to an equilibrium basis demand and consumption rather differential state taxes and levies; RERA and Demonetisation, on other hand, shall lead to changes in the industry structure and capital form. All this topped up with awarding affordable housing projects an 'Infrastructure Status', a long pending demand that will result in positive growth of the real estate sector.

While Demonetisation, a ‘necessary evil’, has resulted to an overnight ‘off-balancing’ of industry in terms of availability of ‘off-balance sheet’ capital, largely used to fund acquisitions and/ or infusion as unsecured debt towards project cash flow requirements; the act has lead developers hunt for institutional partners with long term capital. RERA will lead to consolidation of the industry, emergence of new classes of capital and platforms of financing. All these reforms will result into a new point of inflection which is the ‘emergence of traditional capital'. 

Globally, Eurozone and UK has 10% and 28%, respectively depending upon non-banking capital, it is only US where it accounts for more than 75% of total lending. Both Eurozone and US model of financing real estate has evolved basis their internal factors including level of industry maturity and compliances, competition, process of approvals/ lead-time, consumerism, tax structures and depth of public capital markets. It is only India, where the industry was never let to follow its natural progression from traditional bank debt to non-banking finance, direct access to retail capital through ECM and DCM including REITs, followed by Quasi and Equity funds, but was long ripped with unsustainable ‘equity-like’ returns with ‘debt-like’ security structure by non-banking platforms.

The new point of inflection shall not only lead bank finance available for affordable housing, giving access to cheaper funds and reducing its dependence on non-banking platforms, but also lead to emergence of clear distinction between debt and equity risk-returns pay off for the industry.

The green shoots are already visible with new fund platforms being setup from the perspective of pure equity risk and returns; active quasi equity with rear-ended equity like returns and construction finance like running coupons’/ assured returns; reduction of non-banking rates by 200 bps to a sustainable 16%-18% per annum ROI; housing finance companies playing more active role in developer financing; products available for unlocking of value of inventory either through leverage or underwriting, LRD and developers registering REITs platforms with regulator providing the necessary capital for commercial assets. All these shall lead us to a new growth story.

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